Cash America and the Structure of Bondholder Remedies

Abstract

Exit provisions have long been a sleepy and uncontroversial part of the corporate bond boilerplate. That changed in September 2016, with the Wilmington Savings v. Cash America decision. There, in response to a covenant violation by a solvent debtor, a US federal court ruled that bondholders didn’t just have the standard right to accelerate the debt, but were entitled to the “make-whole” premium that the debtor would have had to pay had it exercised its option to redeem the bonds. The decision caused consternation in the corporate bar on the grounds that the interpretation was orthogonal to market understandings. The result: a quick and concerted effort from a number of elite law firms to revise the standard remedy clauses in bond indentures. But it failed. By examining exit provisions in the context of the larger architecture of a corporate bond, we seek to understand why investors might have resisted the attempts to contract out the Cash America interpretation of the remedy clauses.

Keywords: Corporate Bonds, Acceleration, Make-Whole, Redemption, Boilerplate

JEL Classification: G32, G33, K12, K22